Fossil fuel companies, including Shell PLC (LSE:SHEL, NYSE:SHEL) and BP PLC (LSE:BP.), may have to hand over a cut of their profits to help households pay ever soaring energy bills, according to draft plans by the European Union.
The European Commission could impose a windfall tax on fossil fuel companies who have gained from soaring energy prices after Russia’s invasion of Ukraine, Reuters reported
The plan, expected to be unveiled this week, would see the EU introduce a "solidarity contribution" for companies that have reaped bumper profits from fossil fuel sales this year.
According to the draft, which is still subject to revision, oil, gas, coal, and refining companies would make a contribution based on their "taxable surplus profits made in fiscal year 2022".
As a result of the scheme, governments could raise capital to mitigate Europe's energy crisis by supporting households and businesses with high energy bills; support energy-intensive industries; reduce EU energy consumption and increase the self-sufficiency of Europe's energy supplies.
"The solidarity contributions are justified by the fact that such companies make unpredictable surplus profits," the draft plans said, reports Reuters.
These profits do not correspond to the regular profits that these entities would or could have expected to achieve under "normal circumstances, the draft adds.
This year, profits for energy companies have been boosted by a rapid recovery in demand following the pandemic as well as a surge in oil and gas prices as a result of Russia's invasion of Ukraine.
Energy companies in Europe reported record profits in the second quarter, with TotalEnergies SE (NYSE:TOT, EPA:TTE) reporting profits of US$11.5bn, while Shell PLC (LSE:SHEL, NYSE:SHEL) reported a quarterly profit of US$9.8bn.
"We acknowledge the need for concerted policy and other action to alleviate the energy price crisis in Europe and elsewhere. We’re aware of the EU proposal for a ‘solidarity contribution’ and await further details from the Commission," a Shell spokesperson told Reuters.
It is proposed that the EU measures apply to a company's surplus profits from 2022 at a level above the average taxable profits in the three fiscal years since January 2019, with future investments assured of a sufficient profit margin.
Windfall profit taxes have already been introduced in some countries, including Italy.
There would be a minimum rate set by Brussels for all EU countries, but governments could choose a higher rate.
In order to pass the measure, a reinforced majority of member states would have to approve it, so unanimous approval from all 27 member states would not be required.
London-listed Shell has extensive operations on the continent, where Shell Energy Europe provides business customers via its portfolio of gas, power and environmental products, with offtake, trade and supply all taking place.
Although based in London, BP has operations in Germany, Austria, Belgium, Hungary the Netherlands, Poland and Switzerland.